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In Focus Collections


Time to prepare for the worst


If the economy is going to suffer from a downturn, regardless of the outcome of Brexit, now is the time to get ready


Murray Bailey Director, Windsor Credit Academy Murray.Bailey @windsorcme.com


In the late 1980s I was employed as an RVP for Citibank’s retail-lending operation in the UK. In my first week the credit director tasked me with finding out what was going on in collections. Early arrears had risen sharply over recent months and the director was understandably concerned despite reassurances from his head of collections. Despite difficulty in dealing with the


head, I soon discovered that his strategy was to move people from later collections to earlier so as to stem the flow; stop borrowers reaching two months in arrears and thereby prevent an increase in write-offs. There was no true strategy, only force of numbers on the telephones. The result? The number of write-offs


doubled within a year and the average loss per account also doubled. There had been poor credit decisions made in the preceding year, but the biggest issue


was the recession – although the downturn was not confirmed by the government for another two years.


Hope for the best, prepare for the worst Whether you believe that Brexit will trigger a recession in the UK or whether the global economy is on a knife-edge, it is highly likely that a downturn is very close by. What a downturn means for individuals


is typically: a loss of overtime, bonus, and potentially employment. Of course, it can also occur at the same


time as a collapse in house prices. This puts a further squeeze on homeowners who may have previously taken an equity release as a way out of financial trouble. In the 1990s recession, many unsecured


lenders found delinquency levels and write-offs doubled very quickly. The more downmarket the lender’s position, the more susceptible they were to borrowers having financial difficulty. After Citibank, I joined HFC Bank who


Unfortunately no business operates in isolation. Even if your lending practices have been rigorous and your affordability assessment conservative, your customers will have credit elsewhere. If they cannot afford their other loans then they cannot afford yours either


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were experiencing bad rates (PDs) that rose between three and four times, pre-recession percentages. We would class them as a near-prime lender today, but back then HFC prided itself on lending responsibly to blue-collar workers. Analysis quickly showed that customers


who had been with the bank for longer were less likely to be impacted by the recession, whereas the more recent borrowers were much more likely. Long before the government confirms


that the country is in a recession (defined as two consecutive quarters of negative growth


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in GDP), individual employees start to feel the pinch on their incomes as companies try to reduce costs. Pending financial stress can lead to


applying for a loan to reduce that stress. Of course, we know that it is not the solution, but to the man in the street there is a short- term need and a quick solution: borrow your way out of debt. For a period of time, the lender will be


unaware of the pending financial difficulty of the applicant. If a lender looks at historical income including overtime and bonuses, the future affordability will not reflect a change in circumstance. I do know of lenders who will ask the


applicant to declare any known change in circumstance, but the success of such questions is understandably limited.


Avoidance of the problem Unfortunately no business operates in isolation. Even if your lending practices have been rigorous and your affordability assessment conservative, your customers will have credit elsewhere. If they cannot afford their other loans then they cannot afford yours either. So, all retail credit operations will


experience worsening performance. There is no way to avoid it, but the degree of deterioration will be determined by the profile of your customers and how susceptible they are to a reduction in income.


Preparation for the worst In my Citibank story, I pointed out the poor strategy. Whilst having appropriate numbers of collectors is vital, this applies to


February 2019


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